Going to extremes with VelocityShares

Investing in VelocityShares could cause you to strike it rich ... or lose your shirt.

By Tom Nawrocki|April 12, 2013 at 08:01 AM

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Have you had a huge year in the market over the course of the past 12 months? If so, you may be invested in VelocityShares, which had the two best-performing exchange-traded notes in the last year.

Or have you gotten destroyed in the market over the course of the past 12 months? If so, you may also be invested in VelocityShares, which had the worst-performing exchange-traded note in the last year … and four of the worst six.

VelocityShares claims to produce “sophisticated tail-risk strategies,” which is apparently a euphemism for all-or-nothing investments that either far outpace the market or collapse altogether. The company offers products betting on three different sectors: volatility, precious metals and energy. When their strategies work, you can practically double your money in a year. When they don’t, you can come close to losing it all. And since its ETNs come in both a long and an inverse variety, sometimes you can do both at the same time.

Here’s what’s happened to some of VelocityShares offerings in the past 12 months (as of the end of the first quarter).

The good

VelocityShares Daily Inverse VIX Short-Term ETN, whose ticker symbol is XIV — get it? It’s the inverse of VIX — returned 89.5 percent in the past year, the highest of all ETFs and mutual funds tracked by the Wall Street Journal. As the name suggests, it’s supposed to replicate the inverse of the S&P 500 Volatility Index, which has been down at historic lows much of the new year. The long-term average for the VIX is 20, but it’s only been above that 20 mark for a grand total of one day since last August. Anything that plays off the inverse of that is going to look pretty good.

VelocityShares Daily Inverse VIX Mid-Term ETN (ZIV) is the older brother to XIV, and performed nearly as well, returning 88.1 percent. The difference between the two funds is the maturities; the weighted average maturity for the mid-term fund is five months, while it’s only a month for the short-term fund. Basically, the mid-term version gives investors a somewhat longer-term outlook on the inverse of the index, which should help dampen the ETN’s volatility.

VelocityShares 3x Long Natural Gas ETN (UGAZ) was up 44.5 percent for the first quarter, placing it third among the Journal’s funds for that time period. The “3x” means that the ETN is designed to show three times the movement of the underlying index, which in this case is the S&P GSCI WTI Natural Gas Index. That was the best-performing commodity index on the entire S&P universe of indexes for March, rising 14.2 percent in that month alone.

The bad

VelocityShares Daily 2x VIX Short-Term ETN (TVIX), the opposite of the ETNs listed above, was the absolute worst-performing fund over the past year, losing a staggering 94.8 percent of its value. It reverses the performance of those inverse-VIX funds — except, remember, the “2x” means it’s supposed to double the index’s movement. It’s also the worst-performing fund for the first quarter of 2013, with losses of 62.8 percent.

VelocityShares 3x Inverse Natural Gas (DGAZ) was down 87.9 percent over the past 12 months, making it the third-worst performing fund over that time frame. It’s the opposite of UGAZ noted above — except, again, the 3x magnifies the losses.

VelocityShares Daily 2x VIX Mid-Term ETN (TVIZ) shows how that longer maturity can help dampen losses in a down market. Its performance was marginally better than the short-term version of this ETN — but it still lost 79.8 percent of its value in the past year, placing it as the fifth-worst performing fund.

VelocityShares Daily Long VIX Short-Term ETN (VIIX) is similar to the TVIX, but at least it didn’t magnify the losses by trying to double the effect of its losing bet on the VIX. That means it lost “just” 69.9 percent over the past year, making it the sixth-worst fund for that time.

The middling

VelocityShares’ roster of metals funds managed to avoid the extreme positions of the volatility and energy ETNs. But even its 3x Long Silver ETN found a way to lose 49.3 percent of its value in the past year, putting it in the bottom 20 performers.

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